Discourages Risk-Taking

The FSA will publish a code later this week detailing how it expects banks to change their policies on pay and bonuses.

The consultation was launched in February, which looks into measures to discourage excessive risk-taking.

Last week there were suggestions that bonuses have been returning in the middle of a boom in profits from investment banking, but FSA’s Hector Sants says that the regulator will not look at individual bonuses from banks.

He also added that the FSA would be responsible for making sure the calculation of bonuses was not encouraging too much risk that would put banks at risk of failing, and also for deciding if the banks are distributing too much money for their own health.

“Our code next week will address those questions and make absolutely clear that you cannot calculate bonuses in a way which encourages unreasonable risk-taking and puts the institution at risk, which was the case in the past.”

Reward Long-Term Success, Not Short-Term Risk-Taking

The Turner Report back in March, suggested that bonuses should be deferred in order to reward long-term success rather than short-term risk-taking. But it did concede that regulators’ failure in the past to consider the effect of banks’ remuneration on their risk-taking had been a mistake that contributed to the current economic crisis.

The FSA now says it will start looking closely into the way bankers are paid in general.

Mr Sants said: “One of the measures we’ll be announcing next week is a requirement for all UK banks to produce for us a clearly articulated pay policy and we will sign off on that.”

He also added that as long as overall remuneration policy is acceptable, the FSA wouldn’t be worried about the question of staffs individual payments. As long as the overall amounts going on bonuses were not too much, the amount going to any individuals would be a matter for shareholders or the government.

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